A recent Tax Court of Canada decision allows the Canada Revenue Agency (CRA) to rely on documents that may have been unlawfully obtained in a criminal investigation to reassess taxpayers’ liabilities.

“It’s not uncommon for the CRA to resort to such tactics although the Supreme Court has tried to create separate watertight compartments for criminal investigations and civil audits by prohibiting the CRA from using the results of civil audits in criminal proceedings,” says William Innes of Rueter Scargall Bennett LLP in Toronto.

Courts have not been hesitant to exclude from criminal trials evidence that has been unlawfully obtained under the guise of a civil audit. But it’s not quite as clear whether evidence unlawfully obtained in furtherance of a criminal investigation can be excluded in civil tax proceedings.

The issue in Piersanti v. The Queen arose when John De Rito, a team leader in CRA’s criminal enforcement division, used his civil powers under the Excise Tax Act (ETA) to obtain information. The ETA is the law that requires Canadian businesses to collect the 5% goods and services tax (GST) and provides for both civil sanctions and criminal penalties.

The information obtained through the civil process subsequently formed the basis of 68 criminal charges relating to GST evasion against Terry Piersanti, her spouse, and several corporations. Ms. Piersanti pleaded guilty to 35 charges without objecting to the evidence obtained through the unlawful use of the civil process. Charges against her spouse and the corporations were dropped.

After Ms. Piersanti pleaded guilty to the ETA charges, the CRA used the same information to reassess Ms. Piersanti’s income tax returns for the relevant period. Ms. Piersanti fought the reassessment and objected to the information’s use, arguing that it had been unlawfully obtained in the first instance.

Now, it’s important to note that as a result of the guilty plea to the criminal charges, no court had actually ruled that the CRA actually broke any laws while working on the criminal investigation. This allegation was first made by Piersanti for the purposes of challenging some of the information that underpinned the administrative proceeding. But the tax court’s decision seems to open the door for the CRA to make use of such material.

The Tax Court conceded that Ms. Piersanti’s rights may have been violated by the use of the information in the criminal proceedings, but noted that he had chosen not to raise that defence at the ETA trial.

“It is [Ms. Piersanti’s] position that the CRA used an improper investigation tool to gather information to prosecute the appellant. It is my view that this position should have been advanced before the criminal court where the Appellant’s penal liability was at issue,” wrote Madam Justice Valerie Miller of the Tax Court. “The only issue before this court is the Appellant’s income tax liability. I find that it was proper for the CRA to use the documents it received as a result of the Requirements to assess the Appellant’s income tax liability.”

Mr. Innes says that the result might have been different if admissibility had been contested and the criminal court had actually made a ruling that the documents had been illegally obtained.

“In that case, I don’t think the Tax Court would have admitted the documents,” Mr. Innes says. “But this being said, the court in my view should have excluded them as a matter of policy.”

Glen Jennings, of Gowling Lafleur Henderson LLP’s Toronto office, agrees. “Taxpayers and their representatives should object promptly when they become aware that the Canada Revenue Agency is using civil audits to support criminal investigations,” he says. “If they wait until trial to start raising these issues, they will have a tougher time that if they’d called the CRA on it when the Agency crossed the Rubicon.”

Mr. Jennings says the Piersanti case exemplifies the CRA’s continuing failure to define the line between the civil process and criminal investigations, despite the guidance from the Supreme Court.

“We don’t hear anyone at CRA saying we have to delineate this dichotomy carefully and document our procedures in a way that makes it clear what auditors and investigators are doing,” Mr. Jennings says. “In fact, sometimes you see audit practices that make you question whether CRA is doing anything at all about the distinction.”

Mr. Jennings maintains it’s unfair that documents obtained unlawfully or abusively can be used in the civil and administrative tax process. “If the courts don’t do something about the abuse, why should CRA’s investigators ever stop?”

The Piersanti case is also a dangerous precedent, Mr. Jennings adds, because many regulatory laws, such as the Competition Act, provide for both civil remedies and criminal penalties. “The courts have got to make it clear that broad administrative powers cannot be abused without respect for Charter rights,” he says.

Mr. Jennings’ colleague, John Sorenson, believes that the Piersanti court passed up an opportunity to take up a supervisory role over certain activities.

“I think there’s an argument that when CRA freely uses audit powers to obtain evidence toward a criminal investigation, it puts the administration of justice in disrepute and therefore makes the evidence inadmissible under the Charter of Rights,” he says.

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